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A couple questions for you Aaron or anyone else that is up on the Fairtax proposal. One of the things that I dont agree with is the prebate. If the Fairtax doesn't address spending (which I don't think it should) than there will still be a welfare system for those that are poor. Why pay an extra 3% in taxes for a prebate if only a few need it and they are already getting welfare? Why not just leave the embedded tax at 20%?
This is a good point, and I think it is addressed in 2 ways.
1) The concept of "only a few need it" is not a guiding principle of this proposal. It aims at fairness, therefore everyone is eligable for the prebate regardless of your economic status.
2) The reasoning for the prebate is to ensure that every American is not being taxed on their essentials of living (food clothing...etc) up to the point of the poverty line. This is how the prebate is calculated. The authors realize that in order for this tax plan to become viable in today's society, it must have a degree of "progressive taxation" at the lower income levels. If you are earning at or near the poverty line, you essentially pay no taxes with the prebate calculated in. If we were to remove the prebate and lower the tax to 20%, those Americans at the poverty line would also be paying the 20%, which would be perceived as "unfair to the poor", thus not a viable proposal. Now the conservative economics in me agrees with you 100%, however in the political world, you must also develop a proposal that has addresses the concerns of the right & the left, while still having an overall positive affect on the nation, which is what theFairTax achieves. Please let me know if I have satisfied your question here? If not, I will go into further detail if you want.
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Next question. I believe the authors of the Fairtax are recommending that even though the employee is no longer paying into Social Security etc. that they still accept the same take home pay. If the business is saving they will rely on that savings to be passed on to the consumer through lower prices. Than the 23% will offset that savings and the taxpayer will be paying the same in the long run as they are now. Which is fine. The big reason for the fairtax will be to attract global business to the U.S. as well as keep our own companies from moving away. Long winded I know. Now the question. What if prices do not lower enough to offset the added inbedded tax?
All studies have shown that we are currently paying about 25% in hidden taxes for all products purchased in the US do to the various levels of taxation from engineering to manufacturing to marketing to retail & of course accounting. When these obstacles are removed, a company will have 2 choices.
a) they can continue on their same prospective corporate net profit margin (% of profit to sales) which would lower the price of their products as their costs are lowered (example: If I strive to make 10% NP and my costs are $100, I would sell my product for $111.11 (100/.9). If my costs are lowered by 25% to $75, I would then sell my product for $83.33 (75/.9), which is a 25% decrease in selling price, while I still maintain my NP of 10%. )
b) they can try to take "windfall profits" on their new lower costs by maintaining their current selling price. This obviously opens the door to competition lowering their price and taking their marketshare. (example: My costs decrease to $75, but I maintain my selling price of $111.11, giving me an NP of 32.5%. My competitor realizes that he can maintain his traditional NP of 10%, and blow me out of the market by lowering his selling price to $83.33.) Either way, the consumer ends up receiving the savings, as long as the government stays out and allows competition to take place.
Now, I don't actually believe that prices will drop by 23% to offset the entirety of the fairtax, however it doesn't matter, because you must remember, the consumer now has 25% additional "buying power" (because they aren't paying income tax) to purchase goods at approximately the same price or slightly higher, and they're not paying any tax on their "essentials" to begin with because of the prebate. This leaves the consume with much more money for additional spending (increasing the economy) or additional savings (increasing available capital --> creating more corporate investment --> increasing the economy).
I hope this helps.....let me know if it is still cloudy, or if you want further explanation.